Learn must-know words, phrases, and definitions for entrepreneurs in the startup investment space.
The startup investment world is full of technical terms and lingo that can be confusing and even intimidating to newcomers. To help make understanding startup funding jargon easier, we’ve gathered 85 must-know terms and definitions in one place. From bridge loans to illiquidity premiums, pre-IPO placements, term sheets, and so much more, we’ve got you covered with the industry’s most commonly-used phrases.
Acquisition: When one company buys most or all of another company’s shares to gain control of that company. Typically, both companies negotiate and agree upon the terms of the deal.
Angel Investor: An individual who provides capital for early stage startups in exchange for equity in the company, and not part of a formal funding round.
Articles of Incorporation: Legal documents submitted to the Provincial, Territorial or Federal governments within Canada which are necessary in order to establish your business as a legal entity.
Bootstrapping: Funding a startup solely through personal finances or operating revenues which allows founders to retain control.
Bridge Loan: A short-term loan to bridge the gap between major financing.
Burn Rate: The rate at which a company spends its capital, or its negative cash flow.
Cap Table: A spreadsheet or table that shows the ownership breakdown of a startup, and includes the company’s securities, what investors paid for them, and the percent of ownership shared by founders, employees, and investors.
Carried Interest (Carry): The percentage of the profits paid to the general partners of a VC fund after limited partners have been paid out 1X their investment .
Churn Rate: The percentage of users, customers, or clients who stop doing business with a startup over a defined period of time.
Cleantech: Technologies or business models developed to reduce negative impacts on the environment.
Compliance: Adherence to laws and regulations.
Convertible Note: A form of short-term debt that converts into equity, usually in conjunction with a future financing round.
Corporate Governance: A system of rules and practices that dictate how a company is managed.
Corporate Venture Capital: When corporations invest in startup companies.
Crowdfunding: Raising small amounts of money from a large number of people, often done online.
Customer Acquisition Cost (CAC): Cost of acquiring a new customer.
Decacorn: A startup with a valuation over $10 billion.
Debt Financing: When funds are raised through borrowing and must be repaid at a later date.
Dilution: When new shares are issued by a company that result in a decrease to existing shareholders’ ownership percentage in the company.
Down Round: A funding round where a startup’s valuation is lower than the previous round.
Due Diligence: A comprehensive appraisal of a business by a VC or financial institution to review assets and liabilities, potential legal issues, and commercial potential.
EBITDA: Earnings before interest, taxes, depreciation, and amortization.
Equity: Ownership in a company, typically in the form of shares held by investors.
ESOP: An Employee Stock Option Pool (ESOP) enables employees to own part of the company in the future and benefit from its growth; they’re used to attract and retain talent.
Exit: When a founder leaves their company, typically by selling their ownership stake to an investor or company through an IPO or acquisition.
Exit Strategy: A way for investors to reduce or liquidate their stake in a company and realize their gains.
Fiduciary Duty: A legal obligation to act in good faith for another party’s interest.
Financial Covenant: Loan conditions that relate directly to a borrower’s financial performance and are commonly included in the loan terms of an operating line of credit.
Fintech: Financial technology that’s designed to improve how financial services are used and accessed.
Follow-on Financing: Additional funding provided to a company by investors who have already invested in the company. Sometimes called a secondary offering.
Fully Diluted Shares/Fully Diluted Ownership: Fully diluted shares are the value of all the company’s common shares, including common shares currently issued and outstanding, preferred shares converted to common shares, SAFEs, and all shares on reserve that could be claimed through the exercise of options and warrants.
General Partner (GP): The most senior position at a venture capital fund, responsible for making and managing investment decisions of their firm.
Growth Hacking: Strategies focused solely on growth, often used by early stage startups.
Harvesting Stage: The final phase in a VC fund’s life that focuses on exiting investments and returning capital to investors.
Illiquidity Premium: The potential excess return an investor earns by investing in an asset that is not easily convertible to cash without a significant loss in value.
Incubator: An organization that supports early-stage startups.
Initial Public Offering (IPO): The first time that the stock of a private company is offered to the public and listed on a stock exchange.
Intellectual Property (IP): Creations of the mind, like inventions or trademarks.
Investment Stage: The initial phase in a VC fund’s lifecycle where the GP deploys capital into portfolio companies.
Key Performance Indicator (KPI): Metric to measure business performance.
Late Stage Venture Capital: Funding for mature startups.
Lead Investor: The VC firm or individual who leads a funding round and typically contributes the largest amount of capital.
Lean Startup: A startup that aims to shorten the time spent developing products in favour of quickly discovering whether they have a viable business model. The methodology is based on experimenting, testing, and recalibrating quickly.
Limited Partner (LP): LPs deploy capital into venture capital funds that are managed by GPs; they take the form of endowments, foundations, pension funds, insurance companies, family offices, fund of funds, and corporations.
Limited Partnership Agreement (LPA): An agreement between LPs and GPs that governs the terms of a venture capital fund.
Liquidity: Ability to convert assets to cash.
Liquidity Event: An event that allows initial investors in a company to cash out some or all of their equity, such as an IPO and acquisition.
Market Validation: The process of determining whether a product or service is of interest in a given market.
Mezzanine Financing: A hybrid of debt and equity financing, often used as a bridge to an IPO.
Minimum Viable Product (MVP): Basic version of a product for early testing.
Mortality Rates: The failure rate among startups, often high in early-stage investments.
Non-Disclosure Agreement (NDA): Legal contract to protect confidential information.
Pitch Deck: A presentation targeted at potential investors to help raise funds for a business. Key elements often include a company’s reason for existence, the problem it’s attempting to solve, its business model, and information about the team.
Pre-IPO Placement: Selling of shares to private investors before the stock is offered to the public.
Pre-seed and Seed Stage Funding: Pre-seed funding is provided by investors (such as family, friends, accelerators) to early stage startups that have a product idea in development. Seed stage funding is a more formal process to raise capital from angel investors or venture capitalists for companies, usually in exchange for some equity stake. During the seed funding round, investors typically want a startup to have shown signs of market success and have the right team in place, while pre-seed funding often takes place before product development finishes.
Preferred Equity: Equity that gives its shareholders preferential payment over common stockholders.
Preferred Stock: A class of stock that provides certain privileges to venture capitalists that help limit their investment risk.
Pre-money Valuation: What a company is believed to be worth prior to completing a financing round. Calculated as the post-money valuation minus the money raised in the round of equity financing.
Post-money Valuation: The projected value of the company after raising a priced round of equity financing, calculated as pre-money valuation plus the money raised in the round of equity financing.
Product-Market Fit: The degree to which a product satisfies strong market demand.
Pro Rata Rights: The rights that allow investors to maintain their percentage ownership in subsequent funding rounds.
Revenue: Income generated from normal business operations.
Risk-Adjusted Return: The potential financial return of an investment that takes into account the amount of risk involved.
Run Rate: Uses a startup’s current financial data to predict future performance.
Runway: The amount of time until a company will run out of money.
SAFE (Simple Agreement for Future Equity): A financial instrument, primarily used by angel investors and accelerators to provide capital to seed stage startups, that is a straightforward single document agreement that can fund a company quickly.
SaaS (Software as a Service): Software offered via a subscription model.
Scale-up: Significant growth of a company in terms of customer base, revenue, or market.
Secondary Market: A market where investors purchase securities or assets from other investors, rather than from the issuing companies themselves.
Series A Funding: A company’s first significant round of venture capital financing.
Series B Funding: Funding for a company that is generating consistent revenue but needs capital to expand.
Series C Funding: Funding for scaling a company that is already successful.
Shareholder Agreement: Contract among a company’s shareholders.
SR&ED: The Scientific Research and Experimental Development (SR&ED) program is administered by the federal and provincial governments that offers tax credits to companies for research and development in Canada.
Stock Option: Right to buy a company’s stock at a set price.
Supporting Stage: A phase in a VC fund’s life where the GP supports portfolio companies and makes follow-on investments.
Sweat Equity: The unsalaried labour a founder puts into their startup to build their ownership interest and increase the company’s value.
Term Sheet: A non-binding agreement that outlines the basic terms and conditions of an investment.
Up Round: A funding round where a startup’s valuation is higher than the previous round.
Unicorns: Startup companies with a value over $1 billion.
Valuation: The estimated worth of a company, typically calculated in relation to a funding round. A pre-money valuation is calculated before a funding round, and a post-money valuation is the worth after the round.
Valuation Cap: The maximum valuation at which an investment will convert into equity during a future financing round.
Valuation Premium: The additional value that investors are willing to pay for a company compared to its fundamental value, often based on future growth potential.
Venture Capital (VC): Pooled investment funds that manage the money of investors who seek private equity stakes in startups and small to medium-sized companies that have the potential to scale and return a profit.
Venture Debt: A loan offered by select banks and non-bank lenders that, unlike traditional commercial loans, is specifically designed for early- to growth-stage companies that have raised a formal round of equity financing.
Vesting: The process of earning the ownership of stock or options over a set period of time.
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